Sometimes, credit Score can be a very complicated subject especially for people who have just started being accountable towards their finances. Most of the times people fail to understand why it is essential, what factors are used to calculate a credit score, how they can check their credit report etc. This ambiguity often gives birth to many half-truths which eventually misconstrues the entire theory of credit Score and why it is essential for your financial health.
What does Credit Score mean?
Credit Score represents your credibility and helps lenders analyze your financial capabilities, credit risk, and behaviour. The score is an outcome of your financial activities like payments history, active loans, length of credit history and credit card utilization ratio. A good credit score ranges from 700 to 900 and any score below 500 is considered as a bad credit score.
Below we are negating 6 common myths about Credit Score:
· Checking your Credit Score too often can bring a dip in your credit score:
The fact is your credit score is not affected by the number of times you check your credit score. There are two types of inquiries, hard and soft. A hard inquiry takes place when you’ve taken an action (i.e., applied for credit) and a lender pulls your credit report in order to review your credit. This type of inquiry can cause a drop in your credit scores. A soft inquiry occurs when you check your own credit score. This type of inquiry does not lead to any change in score.
· Closing credit card and other credit accounts increase my credit score:
The longer the credit history, the better it is for your score. Closing a credit card is more likely to hurt your credit score than to help it, particularly if you close the card with a balance. Credit scoring models don't assess risk by how much credit you have available, but rather by how much of that credit you're using — a ratio known as "credit utilization". So, leaving accounts open, especially if they’re in good standing, is typically better for your credit score.
· There is only a single credit score:
It's likely that the credit reports from all the four credit bureaus will be slightly different and, therefore, so will the credit scores. The primary reasons being not all accounts will be reported to all four credit-reporting agencies, accounts on consumers' credit reports are not always updated at the same time and credit reporting companies' scoring models are different.
· Paying off collections immediately removes it from your credit report:
Your credit report reflects your credit history, which includes all your accounts and their associated payment statuses – both on-time and late payments. Late payments and collection account stay on your credit report for a fair period. So, simply paying off a debt will not immediately remove it from your report. Each time your credit report is pulled, your credit score drops.
· Bad credit score means = No Loans: A bad credit score makes it harder to get approved, but it’s not the only factor that creditors and lenders consider when they’re evaluating your creditworthiness. Income, Age, Amount of debt are other factors that play a role. You can be approved even with a bad credit score but you may be required to show collateral or given a higher interest rate.
· If I am keeping my credit activities on check then I do not need to know about my credit score:
The fact is it is essential to check your credit score at least once a year with RBI regulated credit bureaus like CRIF to have a clear picture of your financial status. CRIF allows you to have a free check once a year. Sometimes your financial activities affect your credit score and you stay unaware about it. Checking your credit score yearly can help you plan your activities accordingly for a more stable and error-free credit report.
CRIF is one of the RBI regulated credit bureau in India that gives you credit report and score in the most accurate form. Make sure you know the facts right and maintain a credit score that is above 700 to acquire financial assistance whenever needed.
